A further rise in insurance premium tax (IPT) to 12% will leave customers paying more for their insurance and will counteract any reforms aiming to lower claims costs and pass on savings to customers.
As part of his recent Autumn Statement, UK Chancellor Philip Hammond announced that IPT is set to increase to 12% from June 2017. This means IPT will have risen three times over 18 months, and that the standard rate will have doubled over two years from 6% in October 2015. In November 2015, it rose by 3.5 percentage points from 6% to 9.5%, which was followed by a smaller 0.5 percentage point increase to 10% in October 2016. News of another 2.0 percentage point rise to 12% from June 2017 will therefore further push up the cost of insurance premiums for customers.
The increase will bring a new set of costs to insurers as they implement the change to their products. It will also have a knock-on effect for consumers purchasing car, home, pet, private medical, and commercial insurance. According to the Association of British Insurers (ABI), the collective impact of the three IPT rises will add more than £25 to the average comprehensive car policy, £19 to combined home policies, and almost £20 to pet insurance.
The ABI called for a freeze on IPT in advance of the Autumn Statement, warning that a further increase could have a detrimental impact by lowering uptake of insurance altogether if customers do not feel they can afford it. Customers are already sensitive to price when it comes to insurance, especially within the private motor and pet insurance markets, where premiums have been increasing regardless of IPT due to growing claims costs associated with whiplash and vet fee inflation.
The government recently announced that it hopes to lower private motor insurance premiums for customers through a crackdown on whiplash claims, allowing insurers to pass on an average saving of £40 to consumers on their policy. But considering that rises in IPT are estimated to add more than £25 to the average comprehensive motor insurance policy, the overall value of government reforms seems debatable.
The fear is that IPT will continue to rise towards the higher rate of 20%, which is already applied to travel insurance. It is also noteworthy that several major EU countries levy higher amounts, such as Germany with an equivalent tax rate of 19%. However, it would be irresponsible to keep increasing IPT. Although the 2% rise is estimated to generate £855m per year for the government according to our UK General Insurance Competitor Analytics tool, customers will be put at a disadvantage though higher premiums, and will become vulnerable if they no longer decide to purchase insurance due to rising costs.
By Danielle Cripps, Insurance Analyst